New tax brings large benefits at modest cost

THE cost of doing business in Zimbabwe has risen in a single one-off jump by around two percent, which will probably be reflected at least partially in similar price rises and consumption will be cut by around four to five percent, again as a one-off, by the change in the intermediated money transfer tax from 5c a transaction to 2c on each dollar transferred.

These two one-off economic hits must be set against the extra $3 billion or so a year Minister of Finance and Economic Development, Professor Mthuli Ncube, is raising in new tax revenue, enough to almost balance his budget so long as he is very strict about controlling Government spending.

This new money has to be used to pay existing commitments, not used to increase spending. The resultant fiscal benefit of a Finance Minister paying at least all recurrent expenditure, like civil service salaries and pensions, out of tax income and limiting borrowing to economy-enhancing capital spending will be continuous, in contrast to the downside of a one-off hit on consumers.

The fiscal stability will in turn lead to monetary stability as the Government drastically cuts its non-sustainable borrowing, all those Treasury Bills and Reserve Bank overdrafts.

That borrowing was creating pressures that could well have derailed the economy again, similar to what happened in the hyper-inflationary era.

The Treasury Bills, when introduced, had a positive benefit, increasing liquidity in the banking sector among other desirable effects. But we have now reached the level when they are the major original source of rising inflation and are getting out of hand. Emergency measures were needed.

Minister Ncube has sold the potential high benefits at what could be a modest cost to his Cabinet colleagues, although he will need to resist pressures that are likely to be applied now. But he needs to do more to sell and explain the programme to the majority of Zimbabweans.

Not everyone has a Doctorate in Mathematical Economics or even a decent first degree in economic or business sciences. What is obvious to some is not obvious to the many.

And already, the Minister will have noticed incorrect conclusions being drawn, sometimes deliberately and sometimes through lack of time to work out all the sums.

The tax is a transfer tax on almost all expenditure in Zimbabwe, since we have switched from using banknotes to using our phones to make almost all payments. The only sectors still on cash are on coins, the kombis and the small-scale vendors, simply because we cannot make electronic transfers of less than a dollar. So the tax is something new.

In a more old-fashioned economy he could have got a somewhat similar effect, although less efficiently, by raising VAT drastically, by at least five percent and quite probably a lot more since VAT does not cover everything while the transfer tax does.

VAT and the transfer tax are both progressive consumption taxes. You only pay them if you spend and the more you spend the more you pay. The transfer tax can be set a lot lower in an economy like Zimbabwe’s where almost all business is done electronically because all spending is thus taxed, including payment of salaries and even payments to Zimra of VAT and PAYE.

To explain why the one off rise in inflation will be lower than the one-off fall in consumption we can look at a very simple example. A shop buys baked beans for $1 000, applies a fixed mark-up percentage and sells these to consumers.

The baked beans now cost more, because the factory that cans them has to pay 2 percent more for a lot of its costs, everything from workers’ salaries to electricity, rates, etc. So the factory now sells the beans for $1 020.

But that shipment actually costs the shopkeeper $1042, once he has paid his 2 percent. But the beans are only one cost, although 4,2 percent higher. The other costs are still only 2 percent higher, so the final selling price is probably around 3 percent higher. And that is the inflation.

However, the person buying the beans as the end-user, the person who eats them, has to pay the slightly higher price plus another 2 percent. So his consumption has to drop around 5 percent. Depending on inputs final price rises will vary considerably, being higher when there are a high percentage of inputs and lower when most of the costs, such as for a lawyer or doctor, are the value added by professional knowledge. So keeping inflation down will require a great deal of honesty and integrity right across all sectors.

When people are asked to tighten belts. They want to see results. That means the Minister and the Cabinet that approved his plan have to produce results and quite significant results in the life of the present Parliament. If the extra money is squandered the Minister and his colleagues will have betrayed a trust.